Finance and Economics in the Modern Economy

July 30, 2013

Okay, I have to start posting more frequently. I've been scooped again! I've been giving talks on the "Five things you Don't Know about the US Economy" to various groups over the last several months and guess what fact number 3 is? The actual level of US indebtedness is much higher than the current "trigger level" of 90+%. Some estimate it to be closer to $200 trillion, not $86 trillion as this economist says (and gets international coverage for saying it!)

June 20, 2013

In a panel discussion in the lovely Princeton Club in the heart of NYC hosted by the Wake on Wall Street Alumni group in February of 1013, I was a last-minute substitute for Dagen McDowell - who had a emergency that called her away -- all is fine, I'm happy to report -- as (co)moderator of this high-powered panel of accomplished industry execs in a very informative discussion of the future of capital markets in the US Economy.

November 17, 2011

Until Congress and President Obama can find the discipline to cut (non-defense) spending, all spending increases must stop. Otherwise, obviously, we will be stuck with them forever -- this year's additional spending will become the spending Congress refuses to cut NEXT year.

September 01, 2011

Consider it my belated birthday present for the President - a mini-primer on some basic irrefutable economic facts.

Let's take his statements today on the extension of the federal gas tax. Here is what will happen should Congress fail to extend those taxes, according to Obama's view of the world:

According to the White House, there are a million jobs riding on the highway bill and over 4,000 workers will be furloughed immediately if it is allowed to expire. “That’s just not acceptable,” Obama said. “It’s inexcusable to put more jobs at risk in an industry that’s already been one of the hardest hit over the last decade.

Okay..........let me see if I can make this simple. Businesses create jobs by staying in business and being profitable. Profits are created when revenues are higher than costs. Taxes are part of a business' costs, as are regulations, and fees, and paperwork, etc. If the federal taxes rise, costs in that industry will rise, output falls, unemployment goes UP -- not DOWN -- and prices to you and me would rise. So, taxes UP, employment DOWN. Fact.

I suppose Obama is talking about the government jobs paid for with this period's tax revenues, but those are not real jobs. Those are not the same as the jobs created in private industy. No, this period's government "jobs" are paid for with this period's tax revenues confiscated from private industry, which then slither through the political bureaucracy losing 40-50% of their value along the way, finding their way to unions, special interest groups, and causes that will support the Obama White House. And that is just this period; next period, the process starts anew, except they always need more, because they can't ever cut any government spending.

Private industry jobs are, well, actual jobs! They are evidence of something working right. They are the result of real business producing a real product or service and selling it to a free people who voluntarily choose to spend their hard-earned money on that item. If a business does all of that well they earn --on my gosh, brace yourselves for a dirty word -- PROFITS!! And they can then use this period's profits to reinvest in the business in order to try to earn even higher profits, can hire more people, produce more products..you know, employment and GDP and quality of life? Businesses can actually support themselves! They generate funds internally or, if they have to borrow or sell equity, they have to convince the lender that their future profits are sufficient to pay the lender back. None of it by force or edict or regulations or threat -- all due to the wonderfully objective, voluntary free-market system.

No, folks, it is a fact of life just like gravity and matter: when you raise costs to business, profits fall, less is produced, unemployment goes up, prices go up, and we are all less well off. Any one who has run a business, or known someone who runs a business, knows this is true. It's the economics that sometimes confuses them. Maybe because people like President Obama and the popular press are the ones trying to invoke economic theory and facts to make claims that make absolutely no sense. Hence, the offer of the remedial training for our Commander in Chief.

And don't even bring up the deficit....our second remedial lesson for the day, Mr. Obama, is the deficit. Mr. President: when government spending, G, is greater than tax revenues collected, T, we have a deficit. The accumulated deficit is the debt. You know, the two things that are increasing at record levels under your leadership? So, you can either lower G, which would help lead the country back to economic liberty and its bounty, or we can raise taxes, which would lead to the series of negative events noted above. And every time you ask for more tax revenues to fix the deficit, you make it abundantly clear that you do not understand that spending is the problem, not taxation.

This, sir, is not an opinion, it is not wishful thinking, a theory or a political point of view. It is such basic economic fact that I cannot find any more basic words to try explain it to you. Maybe a set of props that you could touch and smell and move around and count, like in a shell game? Maybe you are a tactile learner! I'd be happy to give it a try -- just get and touch and we'll get it done!

August 14, 2011

The Federal Reserve pledged on August 9th to maintain near-zero interest rates through the summer of 2013. This was an unprecedented move by policymakers and one has to wonder what they were trying to accomplish by committing themselves now to a specific policy for the next two years.

The federal government really has only two tools for influencing the macroeconomy -- fiscal policy and monetary policy. By committing themselves now to a specific interest rate target, they have essentially neutralized one of those two tools.

I see the announcement as an admission on the part of the Fed that they are unable to further stimulate the economy by lowering interest rate targets. The rates are already as low as they can go; there is no room left for trying to stimulate the economy with actions. All they have left is talk; tell the market that they are going to keep the rates low. It's a fairly impotent policy, not just because it's just talk, but because the pledge is vacuuous: if conditions change, I certainly hope and expect that the actual policy will change as well.

And we have to recall what a low interest rate policy actually means: the Fed will have to increase the money supply at whatever rate is required to satisfy money demand -- which is beyond their control -- at the target interest rate. The Fed is clearly banking on (no pun intended!) money demand remaining anemic, otherwise the very increase in money supply which is intended to keep interest rates low would push nominal interest rates up due to inflationary pressures.

From where I stand, the Fed's handcuffing itself to near-zero interest rates over the next two years smacks of both desperation and gloom. They are desperate to wield monetary policy, to "do something," even when rates are already as low as they can go. And for the Fed to commit to near-zero rates over the longer term says very clearly that they do not expect the economy to recover for some time.

August 07, 2011

You cannot have it both ways. Either the bond credit ratings mean something, or they don't. Public officials cannot point to the AAA ratings as evidence of good policy, then lambast them as "inaccurate" and "flawed" when they drop to AA+....or below.

It is a fact that the ratings agency does not originate information; it simply gathers and interprets data that are publicly available to all of us. The rating itself, however, is unique in that it summarizes a particular agency's forecast of how likely the US government is to repay its debt and sustain its borrowing needs.

Don't get me wrong -- there is a LOT of information out there about the risk-adjusted rate of return on US debt to be digested. But we don't have to re-examine it from the ground up -- we need only look at the marginal changes, the most recent developments, the direction of change, to update our expectations, and -- in my view -- to understand easily why S&P downgraded the debt.

I think most of us realize that all government spending is financed by the private economy but I'm not as sure that everyone realizes that the return on government debt is also enabled by the productivity of the private economy. The more productive the private economy, the higher rate of real return we can afford to pay on U.S. debt, and the more willing others are to buy our debt. Being able to generate a return on debt is a good thing -- it's a sign of a healthy economy.

Then there is the other side of the equation: the required return on debt from the point of view of the lender. The lender assesses the risk (or likelihood or uncertainty) that they will get their money back (and that the "money" is worth the same per dollar....so we are ignoring inflation just to simplify things). The less certain they are, the higher the return they are going to demand before they buy the debt. This required rate of return is a cost to the economy -- a higher cost eats away at profits, and makes the economy less productive, less able to reinvest, employ capital and labor, and grow.

In the simplest terms, government spending is supported first by taxes and then, when those run out, by borrowing. The debt ceiling debate made it clear that Washington was unwilling or unable to reduce or curtail government spending, which was on its way to starving the private economy of the sufficient earnings, liquidity and financing to continue to be productive. The wealth creation capacity of the private economy is vast and impressive and has somehow miraculously employed labor and capital and supported AAA rating returns on government debt for a very long time, but it's not limitless.

No, the ratings do not originate information. They simply publicly confirmed what many of us who understand and respect what private enterprise does day in and day out saw coming: the current level of government spending is unsustainable. The private economy cannot take much more of the oppression and costs imposed by government policy, taxes, fees, regulations and -- perhaps the most troubling and insidous of all -- the public denigration and disparagement of the private economy, Wall Street and capitalism by our President.

It will be very interesting to see if this was a surprise to the markets.

June 24, 2011

I'll let Geithner's own words display his ignorance about the source of economic wealth creation in our economy and the size and sign of the Government spending multiplier. Patently unbelievable:

Geithner, continuing, argued that if the administration did not extract a trillion dollars in new revenue from its plan to increase taxes on people earning more than $250,000, including small businesses, the government would in effect “finance” what he called a “tax benefit” for those people.

“We're not doing it because we want to do it, we're doing it because if we don't do it, then, again, I have to go out and borrow a trillion dollars over the next 10 years to finance those tax benefits for the top 2 percent, and I don't think I can justify doing that,” said Geithner.

April 04, 2011

U.S. Attorney General Eric Holder, on behalf of President Obama, has reversed himself. The five alleged co-conspirators in the 9/11 bombings will be tried by military commission at the Guantanamo Naval Station in Cuba.